Excerpt:interest - stipulation in mortgage bond for interest at 75 per cent, per annum, whether penalty--liquidated damages--undue influence--embarrassment of debtor--unconscionable bargain--contract act (ix of 1872), sections 16, 74, illus, (f), an amended by act vi of 1899, section 4 (1)- act xxviii of 1855, section 2. - .....50 on a certain date and, in default, to pay interest at re. 1 per day, that is at the rate of 730 percent, per annum. it was held that, looking at the entire instrument, the amount of interest appeared to be in the nature of a penalty, because 'one rupee per diem for failure to pay rs. 50 is as interestan extortionate amount, for which (sic) adequate consideration is shown and which no man would contract absolutely to pay.' the contention that the court was fettered by act xxviii of 1855 was over ruled, and it was said that if any other view were taken, there would, be no limit to the extravagant and extortionate extent t(sic) which the most usurious claims might not be carried in the name of 'interest.' this decision accords with that in chuhar mal v. mir (1880) i. l. r. 2 all. 715,.....

Judgment:

Mookerjee, J.

1. This is an appeal by the plaintiffs to enforce a mortgage security executed in their favour on the 9th June 1904. The history of the transactions between the parties prior to the mortgage may be briefly narrated. On the 24th July 1895, the plaintiffs advanced to the defendants a sum of Rs. 375 to carry interest at 24 per cent, per annum. On the 25th January, 1899, the defendants gave the plaintiffs a bond for Rs. 600 in renewal of the promissory note of the 24th July 1895. The bond carried interest at the rate of 75 per cent, per annum. In 1901, the plaintiffs sued to recover their money. The Court held that the plaintiffs should not be allowed interest at 75 per cent, per annum, and made a decree for the amount named in the bond with interest at 24 per cent, per annum. The amount decreed was Rs. 1,060 and this carried interest at 6 per cent, per annum till realization. On the 8th June 1903, the plaintiffs advanced to the defendants a sum of Rs, 300 on a promissory note, which carried interest at one parties per rupee per day, that is, at the rate of 570 per cent, per annum. On the 9th June 1904 accounts were taken between the parties, and it was found that that. 1,230 was due on the decree and Its. 2,010 on the promissory note. The creditors, however, agreed to receive Rs. 100 in cash and an instalment mortgage bond lor Rs. 1,500. The mortgage instrument provided for the payment of this sum of Rs. 1.500 in ten instalments spread over five years, with the condition that it default was made in the payment of one or two instalments, the creditors would be at liberty to realize the whole sum due, together with interest, thereon at 75 per cent, per annum from the date of default.

2. Ample security was given for the sum named, and the plaintiffs accepted the instalment bond. They then commenced this action on the 5th July 1909 on the allegation that only Rs. 200 had been paid by the debtors, that default had been made in the payment of one instalment, and that they had become entitled to realize the entire sum secured less the amount paid, with interest thereon at 75 per cent, per annum from the date of default.

3. The claim was for Rs. 1,300 as principal money and Rs. 3,949-14 as interest thereon from 15th June 1905 to the date of the institution of the suit. The substantial defence was that the claim for interest was not enforceable. The Subordinate Judge has accepted this view, and has made a decree for Rs. 1,300 with interest thereon at 24 per cent per annum from 15th June 1905 till the date of realization. The plaintiffs have appealed to this Court mid have contended that interest should have been decreed at 75 per cent, per annum. On behalf of the appellants reference has been made to the cases of Sunder Kumar Koer v. Sham Krishen (1905) I. L. R. 34 Calc. 150., Miajan v. Abdul (1906) 10 C. W. N. 1020., Kirti Chunder v. Atkinson (1906) 10 C. W. N. 640., Umesh Chandra v. Golap Lal (1903) I. L. R, 31 Calc. 233., Mackintosh v. Crow (1388) I. L. R. 9 Calc. 689., Proyag v. Shyam Lal (1903) I. L. R. 31 Calc. 138.

5. The first contention of the respondents is that the stipulation for the payment of interest at an exorbitant rate upon the entire amount secured by the mortgage in the event of default of payment of one or two instalments was in the nature of a penalty. Before we examine this argument in the Light of judicial decisions, it is desirable to point out that in the. solution of this question, no real assistance can be derived from the class of cases in which there is a stipulation for payment of interest at an advanced rate on default of payment of principal or interest on the due date or the other class of cases in which, on default of payment of principal or interest, stipulation is made for payment of compound interest at the same rate as the simple interest originally agreed to be paid or at a higher rate. The case before us falls within the class where there is a stipulation for payment of interest at a specified rate, if the principal or a part thereof is not paid on the due date. One of the earliest examples of this class of cases is the decision in Motoji v. Skekh Hosain (1869) 6 Bom. H. C. 8., where a promissory note, after stipulating for the repayment of the sum due by monthly instalments without interest, provided that on default of payment of any one instalment, interest would be payable at the rate of 75 per cent, per annum It was ruled that the stipulation for interest was in the nature of a penalty. This view was followed in Pava v. Govind (1873) 10 Bom. H. C. 382. where a promissory note provided for repayment of the sum due without interest within three months from the date thereof, and for interest sit 75 per cent, per annum in the event of default in punctual payment; it was ruled that the rate of interest was a penalty..., The Court overruled the contention that the creditor was entitled to enforce the contract strictly under Act XXVIII of 1855 which abolished all usury laws. Section 2 of the Act provides that in any suit in which interest is recoverable, the amount shall be adjudged or decreed by the Court at the rate if any agreed upon by the parties, and if no rate shall have been agreed upon, at such a rate as the Court shall deem reasonable. The Court held that the statute did not destroy the equitable jurisdiction of the Courts to relieve against a penalty. A similar view was taken in Bansidhar v. Bu Ali Khan (1880) I. L. R. 3 All, 260. There the defendant agreed to repay to the plaintiff a loan of Ks. 50 on a certain date and, in default, to pay interest at Re. 1 per day, that is at the rate of 730 percent, per annum. It was held that, looking at the entire instrument, the amount of interest appeared to be in the nature of a penalty, because 'one rupee per diem for failure to pay Rs. 50 is as interestan extortionate amount, for which (sic) adequate consideration is shown and which no man would contract absolutely to pay.' The contention that the court was fettered by Act XXVIII of 1855 was over ruled, and it was said that if any other view were taken, there would, be no limit to the extravagant and extortionate extent t(sic) which the most usurious claims might not be carried in the name of 'interest.' This decision accords with that in Chuhar Mal v. Mir (1880) I. L. R. 2 All. 715, where interest payable on default at the rate of 37-1/2 percent, was held penel. In Kunjbehari Lal v. Hahi Bulesh (1883) I. L. R. 6 All. 64. and Maya Ram v. Nawbat (1885) All. W. N. 85 where the interest stipulated to be paid on default of payment without interest on a specified date, was 24 percent., it was held to he not penal; the rate, it was said, was not so exorbitant as to justify reduction by the Court The principle recognised in these cases lies at the root of the decision in Vythlinqa v. Ravana (1882) All. W. N. 85., where the defendant had agreed to repay a loan of Ks. 10 within fifteen days, and on default, to pay interest at the rate of one anna per rupee per diem, that is, at the rate of 2,250 percent, per annum. It was ruled that the stipulation for interest was penal, though the Court was not agreed upon the question, whether Section 74 of the Indian Contract Act covered the case. The uniformity of the current of decisions we have analysed, was arrested, by the case of Arjan Bibi v. Asgar Ali (1886) I. L. R. 13 Calc 200, where the bond provided for the repayment of the loan within a certain period, and on default, for interest at 150 percent, per annum from the date of the bond. The Court held that the stipulation for payment of interest was enforceable, as the case fell within, Section 2 of Act XXVIII of 1855 and was not covered by Section 74 of the Indian Contract Act (as it then stood), inasmuch as the bond mentioned only one rate of interest and did not provide for the payment of two rates of interest. This view was adopted in Gokul Chand v. Khaja Ali (1890) Panj. Rec. 32. though the opposite position was immediately afterwards accepted in Kanailal v. Narayan Das (1894) Punj. Rec. 99. In Sankarnarayna Vadhyar v. Sankaranarayana Ayyar (1901) I. L. R. 25. 343. the bond provided for repayment of the sum due in twelve instalments, with the stipulation that in the event of default, the debtor should become liable to pay the whole amount of the loan with interest at the rate of I8O percent, per annum. The Court held that the rate cannot be said to be exorbitant, 'having regard to the relations between the parties and the circumstances in which the defendant undertook the obligation which he failed to fullfil.' To the same effect is the decision in Chinna v. Pedda (1902) I. L. R. 26 Mad. 445, (where, however, the rate of interest was only 12 per cent, per annum) as also in Periaswami v. Subramanian (1902) 14 Mad. L. J. 146. Notwithstanding the small group of cases to which we have referred, where a restricted view was taken of the authority of the Court to relieve against a penalty, the tide has turned, back, and the more modern cases repudiate the doctrine that any rate of interest, however exorbitant, cannot be deemed penal. Thus, in Miajan Patari v. Abdul Jubbar (1906) 10 C. W. N. 1020. Whore there was a stipulation for the payment of interest at. the rate of 75 per cent, per annum from the date of the bond on failure to pay the principal sum in two instalments on specified dates, the Court held that the stipulation was in the nature of a penalty and declined to follow Arjan BiBi v. Asgar Ali (1886) I. L. R. 13 Calc. 200 and Sankaranaryana Vadhyar v. Sankaranarayana Ayyar (1901) I. L. R. 25 Mad. 343 as authorities for any inflexible rule of law. This view was adopted in Velchand v. Flagg (1911) I. L. R. 36 Bom. 164 : 14 Bom L. R. 18 where 60 percent, interest on an account originally made up very largely of interest at an exorbitant rate was treated as penalty. It is obvious that each case must be treated on its own circumstances; thus while in Aunamalai v. Sellappa (1911) 10 Mad. L. T. 77 : 2 Mad. W. N. 367. Interest at 36 per Cent, was held not penal, in Ganapathi v. Sundara (1909) 22 Mad. L. J. 354., compound interest at 300 percent, on default of payment on due date was deemed a penalty-; see Salem Town Bank v. Venkala Cliariar (1910) 2 Mad. W. N. 134 9 Mad. L. J. 363. Sampat v. Chango (1901) 7 Nag. L. R. 46. We adopt the principle, consequently, as fairly deducible from the modern decisions, that the Court is competent to grant relief whenever the rate of interest appears to the Court to be penal. This view has been adopted by a Full Bench of the Madras High Court in Muthukrishna v. Sankaralingam (1912) I. L. R. 36 Mad. 229. It is not of much moment to consider whether the Court can grant such relief in the exercise of its equitable jurisdiction or under Section 74 of the Indian Contract Act as amended in 1899. It is sufficient to observe that although the section was originally framed to deal with the doctrine of penalty and liquidated damages as understood in the law of England, it is in its present form comprehensive1 enough to include the type of cases now before us, because it covers all cases where the contract contains 'any stipulation by way of penalty.' The question consequently reduces in any concrete case to this; does the contract contain a stipulation by way of penalty. In the solution of this question, the observations of Lord Mersey in Webster v. Bosanquet [1912] A. C. 394. may be usefully borne in mind. The test is, was the agreement to pay the damages for the breach of Covenant or contract unconscionable and extravagant, such as no Court ought to allow to be entered into. No hard-and-fast rule can, however, be laid down as to what may or may not be unconscionable or extravagant to insist upon in the circumstances of the particular case. As Lord Halsbury said in Clydebank Engineering Co. v. Don Jose Castaneda [1905] A. C. 6., it is impossible to lay down any abstract rule as to what it may or may not be extravagant or unconscionable to insist upon, without reference to the particular facts and circumstances which are established in the individual case. In the same case, Lord Davey added: 'You are to consider whether it is extravagant, exorbitant or unconscionable at the time when the stipulation is made, that is to say, in regard to any possible amount of damages which may be conceived to have been within the contemplation of the parties when they made the contract.' It need not be disputed that a stipulation for merely accelerating payment Of the whole debt in default of payment of one or more instalments is not, by itself, by way of penalty : Ex parle Burden (1881) 16 Ch. D. 675. Sterne v. Beck (1863) 1 De G. J. & Section 595. Wallingford v. Mutual Society (1880) L. R. 5 A. C. 685. illustration (f) to Section 74 of the Indian Contract Act. But the position is very different when the entire sum, which the creditor had agreed to receive in instalments, without interest, is not only made repayable in one sum, hut is also made to carry interest at an unusual rate. The Court may, in view of all the circumstances of the case, regard the stipulation for payment of interest at an exorbitant rate as penalty. In the case before us, the history of the previous transactions between the parties shows that a very considerable portion of the sum (Rs. 1,500) secured by the mortgage was interest on the original sums advanced by way of loan. The decree, which had been obtained by the creditors, carried interest at 6 percent, per annum, while the promissory note carried interest at such an exorbitant rate (570 per cent, per annum) that no Court could possibly enforce payment thereof ; when the creditors received payment of Rs. 100 in cash and agreed to receive the balance (Rs. 1,500) in instalments, without further interest, spread over five years, the transaction was by no means too favourable to the debtors who were made to furnish ample security. In these circumstances, when the stipulation was made that upon default of payment of one or two instalments, not only would the whole balance due become forthwith payable, but would carry interest at the rate of 75 percent, per annum, we may properly hold that the covenant for payment of interest at this rate was a penalty, that is, it does not represent the damage which the creditors were Likely to suffer by reason of the default of the debtors, but was rather intended as an effective means to secure punctual performance of the contract. In our opinion the Subordinate Judge very properly declined to allow the plaintiffs interest at 75 per cent, per annum.

6. The second contention of the respondents is that the Court should decline to enforce the covenant for payment of interest at 75 percent, per annum in view of the provisions of Section 16 of the Indian Contract Act as amended in 1899. There is considerable force in this contention, as the case is of the type mentioned in Illustration (c) of Section 16. We need not dwell at length, however, on this aspect of the ease; it is sufficient to point out that when the mortgage was executed for Rs. 1,500, the debtors were in a position of extreme embarrassment. The creditors held a decree which they could execute any moment and sell up their properties, and the case for. the defendants is that they threatened to do so. At the same time, the creditors held a promissory note which carried interest at the ruinous rate of 570 percent. per annum. There can be no question that the creditors were in a position to dominate the will of their debtors, within the moaning of Section 16, and although the latter furnished ample security, the creditors made the best bargain they could; they obtained a covenant for interest at 75 percent, that is, interest at the very rate which had been disallowed by the Court in 1901, even when they were in the position of unsecured creditors. It need not be disputed, as has been repeatedly laid down, that urgent need of money on the part of the borrower does not, of itself, place the lender in a position to dominate his will within the meaning of Section 16 Similar Koer v. Rai Sham Krishen (1906) I. L, K. 34. Calc. 150. L. R. 34. I. A. 9. Ganesh v. Vishnu (1907) I. L. R. 32 Bom. 37., Umesh Chandra v. Gopal Lal (1903) I. L. R. 31 Calc. 233., Chatring v. Whitchurch (1907) I. L. R. 32 Bom. 208., Debi v. Ganga (1910) I. L. R. 32 All. 589., Megh raj v. Ganga (1910) 7 All. L. J. 729., Megh Raj v. Harga-yan (l9lO) 7 All. L. J. 655. Sri Chand v. Niadvr (1911) 8 All. L. J. 407. but in the case before us is not necessary for the debtors to rely upon this doctrine; here the facts make it clear that the creditors were in a position to take advantage of the embarrassment of their debtors and the bargain they made was unconscionable ; consequently, there is a concurrence of the two elements which must combine to attract the operation of Section 16: Davis v. Maung Shwe Goh (1911) I. L. R. 38. Calc. 805., Kesavulu Naidu v. Arithulai Ammal (1912) I. L. R. 36. Med. 533.

7. We desire to add, however, that the decree of the Subordinate Judge is erroneous, and if there had been a cross-appealby the defendants, we would have varied it. The Subordinate Judge has allowed, interest at 24 parcant, per annum till realisation. This is clearly wrong. Interest at such rate should have been allowed only up to the date fixed for repayment and redemption by the decree, and interest thereafter should have been allowed only at 6 percent, per annum. We are also of opinion that the rate of 24 percent, allowed by the Subordinate Judge is too high, in view of the facts that the sum secured by the mortgage was composed largely of interest at a high rate on the original loans, and that the debtors had furnished ample security ; the .justice of the case would have been met if interest had been allowed at 12 percent. Finally, the Subordinate .Judge has allowed the plaintiffs full, costs of the suit (inclusive of the court-fees and hearing fee), though he has decreed the claim for less than half the amount; in ordinary course, each party should have been allowed costs, to the extent of his success; at any rate, the plaintiffs should not have got costs oh the amount not decreed in their favour. It is thus plain that the appellants have no reason whatever to complain of the decree of the Subordinate Judge, which is really too favourable to them.